The sub-prime tentacles reach deeperJoe Adamaitisrefinancing or purchasing, consequences, defaults
Sub-prime, sub-prime, sub-prime! We hear it day in and day out.
We can beat the story of the sub-prime debacle until the cows come
home. However, there lies an even more devastating side effect
which is mostly unseen by the general public and is not addressed
by any of those commentating on the demise of the sub-prime market.
We focus on the action committed, but do not delve into the huge
impact of said action.
Here's what I'm getting at. We've all read about New Century
going under, and many others closing their doors. We even have Web
showing, at last count, more than 90 lenders on the verge of
closing or who have closed their doors. The concern I highlight is
that no one is seeing or hearing about the damage done by these
lenders who, up until the last minutes prior to closing their
doors, are carrying on business as usual, calling on brokers,
lenders, banks and credit unions to send in new loans.
Let me paint you a picture, and I warn you, it's not pretty.
Consider, for a moment, the devastation this can cause not just to
borrowers, but the economy and the mortgage industry. Currently,
thousands of borrowers are in the process of refinancing or
purchasing a home. They have been told by their loan officer or
mortgage broker that they have been approved and are waiting to
close. Everyone involved has helped the borrower get the approval
and has done their job up to this point. Funding is all that's
And then, bang! With no warning and no indication, the
announcement comes over the e-mails and faxes to thousands of
mortgage companies, banks and credit unions who have helped these
borrowers and intend on selling the paper to this particular
lender. "We have closed our doors! We will not honor any approvals,
Ladies and gentlemen, including our political representatives,
please, take a moment to consider the impact. Thousands are
approved to buy a home. Those buyers have sellers who have also
arranged to buy their next home and have loan commitments in hand
from their lender. The snowball has begun to roll, and the closing
of just one lender can be catastrophic. There could be as many as
1,000 to 10,000 to 20,000 or more scheduled transactions which will
now fall apart because of one lender closing their doors! Imagine
the impact one lender can have. The same thing can be said for
This leaves us to examine why we allow lenders (those who buy
the mortgage paper) to string everyone along until the last
possible moment. Allowing this to happen puts every one of the
parties in a bad position. The loan officers and mortgage brokers
are blamed--as it is perceived by the borrower that they did
something wrong. The buyers default on their purchase, causing a
snowball of defaults. Those refinancing and who may have put their
mortgage payments on hold thinking they were closing are now late,
and those refinancing to beat the increase in their adjustable have
just gone into shock!
My statement to all, including our political representatives,
is, "Beware of the unseen consequences of this situation." There's
much more to it than meets the eye, and changes should commence
immediately. Yes, I'm in the mortgage industry and have been for
more than 25 years. This has happened before, and unless we change
the rules, it will continue to happen. The lenders you see closing
their doors are doing so for a number of reasons. Certainly, the
sub-prime issue is at the forefront; however, the most common is
the lack of business. These firms are wholesalers for the most part
who rely on huge volume. They profit on small margins and, as we
all know, the volume is not what it used to be; therefore, profit
dries up. Jobs are lost with no warning, and borrowers, sellers,
mortgage lenders and brokers all become the victims.
The bottom line ... a message should be sent to those who
solicit for new business up to the very end. Stop or be fined. For
those politicians who want to make hay such as Connecticut Sen.
Christopher J. Dodd, here's where you can help make a difference.
Until then, we should keep our heads up for more incoming news.
Joe Adamaitis is president of Direct Mortgage
Services Inc. He may be reached at (603) 427-6083, e-mail [email protected]